January 6, 2010

AEI Says Stimulus Boosted Economy By 4%

We can expect 2010 to be a volatile year. This likelihood is underscored by looking back at 2008 and 2009. Two thousand eight was a highly volatile year leading up to the collapse of Lehman Brothers in September, which was followed by the risk of a total systemic meltdown. That sharp and obvious risk spike prompted massive policy responses that were simply the largest that central banks, with rate cuts and liquidity provision, and governments, with tax cuts and spending increases, could manage. The result--beginning in March 2009--was a linear rise in the prices of risky assets, the result of massive relief once the slip into a global depression had been averted and the acute phase of the crisis in the financial sector had passed.

The real economy also responded to the massive stimulus but remained heavily dependent on it. In the United States, growth during the second half of 2009 probably averaged about 3 percent. Absent temporary fiscal stimulus and inventory rebuilding, which taken together added about 4 percentage points to U.S. growth, the economy would have contracted at about a 1 percent annual rate during the second half of 2009.

The conservative line, of course, is that stimulus has utterly failed. To be sure, Makin is a credentialed economist, and therefore not in a position to be influencing the likes of Jim DeMint:

It is now clear that taking a trillion dollars out of the private economy and spending it on wasteful government programs has been an utter failure. Instead of creating real job growth, the stimulus has grown the burden of debt and increased the likelihood of high inflation and taxes. Since the beginning of this year, nearly 3.8 million Americans have lost their jobs. Unfortunately, instead of ending the failed stimulus, Washington continues to pursue a big government agenda of takeovers, spending and taxes that would further harm our economy."